Put option
The right, but not the obligation, to sell the underlying at the exercise price. The holder's gain is capped at the exercise price less the premium, because the underlying cannot fall below zero.
Where you will meet it
Put option appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Work out what a put option pays at expiry
“At expiry a put option's payoff is max(0, X - S), where X is the exercise price and S the price of the underlying.”
- Explain how tail risk in a credit portfolio is measured and controlled
“Controls include diversification by issuer and sector, position limits, and hedges such as buying CDS protection or put options on credit ETFs.”
See also
Practise it
Practise put option until it is automatic: questions that explain every wrong option.
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